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08/08/2022

Gulf Bank holds its first half 2022 earnings webcast

Menon

  • We continue to deliver strong performance across all our business lines and make excellent progress with our growth strategy and digital transformation initiatives.
  • Our strong financial position reflects the high quality of the Bank’s loan book and effective management of credit risk.
  • Gulf Bank Board of Directors has agreed to proceed with the due diligence process to consider the viability of potential collaboration between Gulf Bank and Ahli Bank of Kuwait in the best interest of the Banks shareholders.

Challinor

  • Q2 was an exceptional quarter for loan growth – Gulf Bank grew almost 7% which is perhaps the highest growth the Bank has seen in any one quarter.
  • Our market share gains in the consumer segment are a key part of the Bank’s strategy, so its pleasing to see the significant progress being made here, particularly in such a competitive market.
  • For our Credit Risk, we are very happy with the way the portfolio is performing and we’re not seeing evidence of deterioration.

Kuwait, 08 August 2022: Gulf Bank held its investors webcast to review and discuss the Bank's financial performance for H1-2022 on Thursday, August 4, 2022. The conference call was organized by EFG Hermes and presented by Raghunandan Menon, Acting Deputy Chief Executive Officer of Gulf Bank, and David Challinor, Chief Financial Officer of Gulf Bank. The discussion was moderated by Dalal Al-Dousari, Head of Investor Relations at Gulf Bank.

Operating Environment

Mr. Raghu Menon commenced the webcast with key updates regarding Gulf Bank’s operating environment for H1-2022. Menon stated, “We continued our positive momentum that we started with at the beginning of the year 2022. I am pleased to report that Gulf Bank has achieved a net profit of KD 30 million for the first half of 2022, a remarkable increase of 83% over the same period of last year. We continue to deliver strong performance across all our business lines and make excellent progress with our growth strategy and digital transformation initiatives. Our strong financial position reflects the high quality of the Bank’s loan book and effective management of credit risk.” Said Menon.

Menon added:” We continue to see a notable loan growth in the industry. According to the latest published Central Bank of Kuwait numbers, year to date total customer loan growth to May, was 5.9%, whereas we grew by 6.7% to June 2022. “He also stated:” We continue to see steady consumer spending in Kuwait reflected in the good performance of the Bank’s retail portfolio as it continued with the upward trajectory momentum. Going forward, and given the high level of oil prices, we hope to see more positive impacts on the overall economy in Kuwait with improvement in business activities, ongoing recovery of government spending and at the same time inflation staying somewhat under control.”

Digital Transformation

On the latest development regarding the digital transformation journey Mr. Menon commented: “On the Bank front, we are proactively meeting the changing needs of customers through digital innovation. We have conducted several initiatives to provide our employees and society with a new set of skills and opportunities to use data sustainably. Our first Datathon competition for digital data and analytics in Kuwait witnessed many participants in the field of data modeling, visualization and digital analytics. In addition, Gulf Bank provided coding training for both new and existing employees. This training aims to providing innovative technical solutions and enable effective contribution to the Bank’s digital transformation plans.”

Sustainability

Mr. Menon also touched on the Bank’s ESG initiatives, commenting: “We further integrated ESG into our strategy. Empowering women, youth and people with special needs is a major approach of Gulf Bank's sustainability program. We pay special attention to minority groups and implement plans for their financial inclusion and independence. Today, the Bank is a founding member of the Women’s Economic Empowerment Platform Kuwait (KWEEP), a local initiative to support the growth and advancement of women in the workplace. Women empowerment is essential at Gulf Bank when it comes to setting future strategies or designing inclusive policies. On this front, it gives us a great pleasure to announce that Gulf Bank has now its first independent woman director on the Board of Directors, Ms. Reem Al Saleh, who has been elected during the last General Assembly Meeting of the Bank”

Potential Collaboration with ABK

On the latest developments regarding potential collaboration between Gulf Bank and Ahli Bank of Kuwait. Mr. Menon commented: “Both banks have received a proposal by major shareholders; namely Alghanim Trading Company and Behbehani Investment Company, to consider a possible business collaboration between the two banks whereby both entities are maintained and one of the entities is converted into a Sharia compliant bank. The proposal was presented to the board of directors of Gulf Bank and the board has agreed to proceed with the due diligence process to consider the viability of this proposal in the best interest of the Banks shareholders. This would entail obtaining necessary approvals from the Central Bank of Kuwait, regulatory authorities, and the general assembly. Any future developments on this matter will be disclosed as and when it becomes available.” Menon added.

Solid Financial Performance

Mr. Menon summarized Gulf Bank’s H1-2022 results with six key messages:

  • Net profit grew by 83% for the first half, to reach KD 30 million in comparison to KD 17 million in 2021.
  • Return on average equity increased to reach 9.1% for first half 2022 from 5.2 % at same period last year.
  • Gross customer loans reached KD 5.2 billion, an increase of KD 599 million or 13% compared to the first half of 2021. This growth was supported by both our Corporate and Consumer segments although at a faster pace from the latter.
  • The quality of our portfolio continued to be resilient as our non-performing loan ratio (NPL) in second quarter 2022 stood at 1.0%, an improvement when compared to last year (NPL) of 1.4%. Additionally, we continue to have ample provisions achieving an NPL coverage ratio of 531%.
  • Relaxed capital regulatory minimums that were introduced in 2020 were partially restored starting from first of January 2022 and will remain for the remainder of the year. With that, our Tier 1 ratio has a buffer of 254 basis points, and our capital adequacy ratio has a buffer of 273 basis points.
  • Gulf Bank remains an ‘A’ rated bank by three major credit rating agencies. Our current position stands as follows:
    • Moody’s Investors Service maintained the Long-Term Deposits Rating of “A3” with a “Stable” outlook.
    • Capital Intelligence maintained the Bank’s Long-term Foreign Currency Rating of “A+” with a “Stable” outlook.
    • Fitch Ratings has upgraded the Viability Rating of the Bank from ‘bb+’ to ‘bbb-‘and affirmed the Bank’s Long-term Issuer Default Rating at “A” with a “Stable” outlook.
    • S&P Global Ratings has maintained the Bank Issuer Credit Rating at “BBB+” with a “Stable” outlook.

Increasing Profitability

Gulf Bank’s CFO, David Challinor, discussed Gulf Bank’s first half 2022 results in details: “We can see the evolution of net profit from 16.5 to 30.3. The increase of 13.8 in the first half of 2022 was mainly driven by a 13.5 drop in total provisions. The Cost of Risk for the first half of 2022 was only 33 basis points compared to 112 last year which shows the overall improvement in the quality of our book. We also saw higher non-interest income of 1.7, as a result of the resumption of economic activities in comparison to a very restrictive environment in first half of last year.”

Mr. Challinor highlighted that the Return on Equity improved by nearly 3.9 percentage points over the same period.

On the breakdown of the income statement, Mr. Challinor commented: “Interest income was up 8.0 or 9% in first half 2022 in comparison to same period of last year. our interest expense increased by 7.6 or 29%. This was the result of upward pressure on cost of funds in anticipation of rate hikes, and also following the actual rate hikes themselves.” He continued: “Operating income increased by 2.1 or 3% reaching 85.3 in first half 2022. This was predominately due to the increase in non-interest income of 9%, mainly driven by fees and foreign exchange income due to the resumption of economic activities and the strong loan growth” He also added: “Operating expenses have increased by 1.1 or 3% year-on-year, with Cost to Income Ratio of 48.3%. We continue to manage our cost base without hindering the progress in our digital transformation and human capital investment and development.”

Mr. Challinor also pointed out that credit costs declined from 16.8 in first half 2021 to 8.0 in 2022. And the Cost of risk was 33 basis points in the first half 2022, declining from 112 basis points for the same period last year.

Gulf Bank’s Financial Position

Mr. Challinor also presented Gulf Bank’s financial position. He also presented the Bank’s mix of assets and highlighted its changes over the last 12 months by saying: “Over the last year, our total assets increased by 586 or 9% to reach 6.9 billion. This was largely driven by a 663 or 15% increase in Net Loans, reflecting a pick-up in economic activity in comparison to last year. Compared to the year-end 2021, Net Loans grew by 345 or 7%. With almost all the growth coming in second quarter itself.”

On Customer deposits, Mr. Challinor stated: “We can see Customer Deposits grew 6% year to date to reach 4.6 billion and our CASA ratio was relatively stable at 37.2% on 30 June 2022.”

As for Gulf Bank’s equity, Mr. Challinor indicated that the total equity increased by 34 or 5% to reach 677 million compared to 643 million the year before. This was largely driven by the improvement in the profitability of the Bank from first half 2021 to first half 2022

Improved Assets Quality

On assets quality, Mr. Challinor stated: “Our non-performing loan ratio, was 1.0% at the end of June 2022, down from 1.4% for the same period last year. Additionally, we continue to have ample provisions achieving an NPL coverage ratio of 531%.”

Mr. Challinor also indicated that as at 30 June 2022, Gulf Bank has 114 of excess provisions, representing 37% of total provisions.

In addition, Gulf Bank’s Stage 1 loans are above 90% for both periods, while Stage 2 declined from 5.6% to 4.7% as of 30 June 2022 and Stage 3 declined from 1.5% to 1.1%.

And on the evolution of Stage 2 and 3 loans percentages over the past 5 quarters, Mr. Challinor highlighted: “We can see that our Stage 2 continuing to be on a downward trend while Stage 3 remains stable at around 1% for the last three quarters.”

Regulatory Capital

On Gulf Bank’s capital, Mr. Challinor said: “Our Tier 1 ratio was 13.0%, which is well above our current regulatory minimum of 10.5%. Our Capital Adequacy Ratio of 15.2% was well above our current regulatory minimum of 12.5%”

Mr. Challinor also indicated that as of 30 June 2022, the Bank’s risk weighted assets grew by 11%, mainly driven by year-on-year growth in the loan book.

In addition, Gulf Bank’s leverage ratio as of 30 June 2022 was 8.7%, which was lower than 9.5% for the same period of last year, but well above the 3% regulatory minimum.

Regarding the liquidity ratios, Mr. Challinor stated: "You can see our Liquidity Coverage Ratio was 258%, Net Stable Funding Ratio was 104% as of 30 June 2022. It is worth noting that both ratios are still well above their respective current minimums of 90% and pre-covid minimums of 100%”

Q&A

Following the management presentation of Gulf Bank’s performance for the first half 2022, the call was open for participants questions. Ms. Dalal AlDousari, head of Investor Relations at Gulf Bank, moderated the Q&A session.

Loan Growth

The Q&A session started with a question on loan growth and what sector drove this growth, Mr. Challinor commented:” Q2 was an exceptional quarter for loan growth, we grew almost 7% which is perhaps the highest growth the Bank has seen in any one quarter. Mr. Challinor added:” The growth was very strong for both our consumer and corporate business. Gross loans to customers in the quarter grew around 330 million with broadly 2/3rds coming from corporate and a 1/3rd from consumer.” He continued: “If we compare to the system, we can see that we grew 6.7% to the end of June and the system grew 5.9% to the end of May (as the June data isn’t out yet). So, we’ll probably be tracking broadly in line with the system for the first half when the data comes out.” Mr. Challinor also added: “But for consumer, we’re growing well ahead of system. To the end of June, consumer grew 8.8% whereas the system grew 3.8% to the end of May. So, we’re tracking around double the system growth. And as you know, market share gains in consumer segment are a key part of the Bank’s strategy, so its very pleasing to see the significant progress being made here, particularly in such a competitive market. Looking forward, I think overall the second half will be slower though. But we’re still looking to grow strongly in consumer and consolidate these market share gains.”

Capital

When asked about capital. Mr. Challinor responded: “We saw the capital ratios drop quite significantly in Q2, primarily because of the 7% loan growth we saw in the quarter. We wouldn’t ordinarily expect to see these type of quarterly capital drops going forward though. We’re comfortably above the current minimums, as I mentioned earlier, but as we know the pre Covid minimums come back in at the start of 2023.” He continued: “When I think about capital I also think about ROE. And we’re obviously looking to lift ROEs into the double-digit space. So, if we can continue delivering our planned growth and strategy without the need to raise capital, then I think that’s the best outcome for all stakeholders. Already at the half,profitability is up significantly from last year, and the full year profits will add to capital at the end of the year. So internal capital generation should be much stronger than what we’ve seen in recent years.”

Operating Expense Increase

On the expense side, a question was raised during the discussion about the increase in the operating expenses compared to previous quarters, Mr. Challinor commented: “We saw expenses increased 3% year on year, and 8% sequentially from Q1 22.” He also added: “The Bank is still very much in investment mode. Both in terms of staff and in terms of the digital transformation that we’re going through. Specifically, we’ve seen an increase in staff costs and this represents the significant investment we’re making in our people who are a key strategic pillar. We’ve also seen some underlying inflationary pressures work through. . And as I said earlier, we’ve also had significant loan growth in Q2, and an element of our cost base is variable and that contributed to some of the increase.”

Cost of Risk

A question was raised regarding the declining trends of the cost of risk. Mr. Challinor commented: “This is the 4th consecutive quarter we’ve seen a drop in credit costs. We booked only 2.9m in Q2, which is a 24-basis point cost of risk. I’ve said the long-term normalized number is probably in the region of a 100. So, we’re very happy with the way the portfolio is performing and we’re not seeing evidence of deterioration. The stage 2 and stage 3 numbers are all looking very strong and stable, so I think we’re in a great position to weather any future stresses that may come from the rate increase cycle.” He continued: “I think in the second half we’d probably see a higher cost of risk, but it would still be expected to be well below the long-term normalized number. And on NPL’s, these are expected to continue to be low and stay below the 2% mark that we guided at the start of the year.”

NIM’s

The last question was about how the rate rises impacted the net interest margin and what is the outlook for the second half. Mr. Challinor responded: “ We said at the beginning of the year we expected the low point in the margin cycle to be in Q1, and from there on we’d start seeing some expansion, and this is indeed what we saw in Q2. But the market continues to be very competitive on loan pricing and we’ve also seen pressures on the interest expense side with deposit pricing, so the overall expansion was less than we’d hoped for. But it’s something we’re very focused on, and in the second half we would expect to see a further expansion in NIM’s from current levels.”

Ms. Al-Dousari concluded the conference by thanking the participants and invited investors and analysts to visit the Investor Relations page of Gulf Bank's website for any further inquiries.

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